When you take out a mortgage, or any other kind of loan, the law requires you to sign a document that signifies your agreement to repay the money. The promissory note represents a binding legal document, enforceable in a court of law. Promissory notes can be sold and transferred, along with the right to collect repayments. If the note is lost, then the owner of the loan might have a problem.

Signing the Note

When a lender closes a loan, the borrower signs a note promising to repay the money. The promissory note carries the amount and terms of the loan, the date of the loan and the signatures of the parties. The lender keeps the note with other valuable documents in a paper file; banks and other commercial businesses typically scan an image of the note into a computer file and put the note into a secure storage facility, such as a safe.

Lost Notes and Mortgage Markets

In the modern mortgage market, promissory notes often find their way from original lenders to secondary buyers. The mortgage-backed securities market that arose in the 1990s made it profitable for financial firms to bundle mortgages together, then sell them as income-producing investments to institutional buyers. In this process, original documents such as promissory notes often get lost in the paper shuffle. In "Foreclosure Foul-Up: Tracking Down Those 'Lost' Mortgages," an article written for "Time" magazine in November, 2010, author Stephen Gandel detailed the process by which one mortgage note on an Orlando home passed from Fremont General, the originator, to Goldman Sachs, Bank of America and ultimately to a Wells Fargo warehouse outside of Minneapolis. "In hundreds of thousands of cases," wrote Gandel, "the promissory note that proves a bank owns a borrower mortgage is now gone. Vanished."

Foreclosure and Legal Actions

Even if a promissory note is lost, the legal obligation to repay the loan remains. Borrowers may not avoid foreclosure on their property, for example, simply on the basis of a lost promissory note. The lender has a right to "re-establish" the note legally as long as it has not sold or transferred the note to another party. In California and other states, a foreclosure action is based on the deed of trust that secures the loan with the mortgaged property.

Affidavit of Lost Note

The lender can still enforce a lost promissory note by executing an Affidavit of Lost Promissory Note. This is a signed and notarized statement that the physical note has been lost, and renders the note legally enforceable (assuming the lender can otherwise prove that the borrower agreed to the loan and its terms). The affidavit must clearly state the amount, interest rate and repayment terms of the loan, the date the original note was signed, and the proper legal names of all parties involved. The lender must file the affidavit in the court having jurisdiction over the matter, along with any supporting evidence, such as a photocopy of the original note.